Executive Summary
China’s $7.3bn trade deficit for February has more than simply a monthly significance. The crucial fact is that it is part of a sustained decline of China’s trade surplus - the details of which are outlined below.
This trend is not only objectively important for the world economy but also refutes analyses that China is pursuing a ‘mercantilist’ course aimed to secure a large trade surplus. The latest figures should therefore be examined against longer term trends.
As a considerable international debate has taken place on the direction of China's trade surplus, this trend clearly confirms the analyses of those, such as this blog, which have pointed to China's declining surplus, with its economic expansion being driven by strong expansion of domestic demand.
China’s declining trade surplus
Evidently no great significance should be attached to a single month's figure for a country’s trade balance – particularly when it coincides with the largest public holiday of the year, as with China’s Lunar New Year (Spring) festival. China ran a trade deficit in February but it will run an overall surplus this year. What is significant is the declining trend of this surplus.
The simplest adjustment that can be made to see the trend, and to avoid the distortions of a single month's data, one which most analysts have carried out, is to combine the January and February 2011 figures. The reason for this adjustment is that China’s Lunar New Year Festival falls some years in February and some in January, so simply an annual month by month comparison results in a seasonal statistical distortion. China ran a $6.4bn surplus in January 2011, and taken with February's result, the combined figure for the two months is a deficit of $0.9bn. As China’s trade surplus is usually higher in the second half of the year than the first, this should not be taken to suggest China will run an overall deficit in 2011.
What was significant, however, was the clearly and sharply declining figure for China’s combined trade balance in January and February this year compared to previous ones. This is shown in Figure 1.
China’s trade surplus for January-February 2009 was $44.0 bn, for the same months in 2010 it ran a surplus of $21.8bn, and for 2011 a deficit of $0.9bn. The sharply declining trend is therefore evident.
Figure 1
The overall trend
To illustrate the longer term trend of China’s trade balance, Figure 2 shows the monthly balances since 1993. Figure 3 shows the monthly figure calculated as a three monthly moving average for the same period. The rising trend from 2004-2009, and the sharply declining trend from 2009 to the present is clear.
Figure 2
Figure 3
The cumulative trend
In order to eliminate the effect whereby China’s trade balance is more favourable in the second half of the year than the first, Figure 4 shows a cumulative 12 monthly total for China's trade balance. The trend is again clear. China's cumulative 12 month trade surplus peaked at $318bn in March 2009 and by February 2011 had fallen to $162bn.
Figure 4
Therefore, by any measure, the declining trend of China's trade surplus in the last two years is evident.
Furthermore, it should be noted that these are, of course, nominal dollar figures. In inflation adjusted terms, or as a percentage of GDP, the decline is greater.
If China's total trade surplus is $150bn in 2011, a reasonable projection given current declining trends, and compared to $183bn in 2010, then China's trade surplus will only be slightly over 2% of GDP.
Conclusion
These trends clearly are crucial in deciding the international debate that has been taking place for the last two years on the dynamic of China's trade surplus - i.e. whether China is pursuing a 'mercantilist' course aiming at a large trade surplus, or whether its very strong economic growth in the last two years is driven by domestic demand.
For over 18 months this blog, as well as other writers, has been analysing China's falling trade surplus. This was in contrast to alternative analyses such as:
- The argument by Professor Michael Pettis, V. Anantha Nageswaran and others who believe that China's growth was is due to an 'Asian model' dependent on large trade surpluses. In reality China's trade surplus has fallen and statistically its rapid economic growth in the last two years has been entirely driven by domestic demand.
- Arguments by John Plender and Martin Wolf of the Financial Times, and others, that China was pursuing a 'mercantilist' policy. In fact China's trade surplus has been falling and not rising.
- Paul Krugman invoking statements that: ‘the International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion.’ The full size of China's balance of payments surplus for 2010 is not yet published, as all elements of invisible trade and payment flows are not yet available, but as the merchandise trade surplus, on a balance of trade basis, was only $183bn, and trade is the dominant elements in China's balance of payments position, it is clear Krugman's claim is false.
- Claims by a number of analysts, for example British economist Will Hutton, that China is ‘increasing its reliance on exports.’ In fact China's trade surplus, and also its exports, have significantly fallen as a percentage of GDP, and the increase in domestic demand has accounted for all of China's growth during the last two years.
The trends clearly show that China's trade surplus has been falling significantly - both in absolute terms and even more sharply as a percentage of GDP. Claims to the contrary, and theories based on such claims, should therefore not be advanced as they are inconsistent with the facts.
